1. Warm-Up How much are you willing to pay for gas?
Would you be happy if the price were less? Why?

2. Consumer & Producer Surplus
Chapter 4: Consumer and Producer Surplus (pages )

3. Demand for Used Textbooks
Potential Buyers
Willingness to Pay
Aleisha
$59
Brad
$45
Claudia
$35
Darren
$25
Edwina
$10
A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.

4. Consumer Surplus
The total consumer surplus is given by the entire shaded area - the sum of the individual consumer surpluses of Aleisha, Brad, and Claudia - equal to $29 + $15 + $5 = $49.

5. Consumer Surplus Consumer WTP Price=$30 CS = WTP-P Aleisha $59 $30 $29
Brad
$45
$15
Claudia
$35 $5
Darren
$25
Will not buy
Edwina
$10
Total CS=$49

6. Consumer Surplus

7. Consumer Surplus
The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price.

8. Consumer Surplus Figure Caption: Figure 4-3: Consumer Surplus
The demand curve for computers is smooth because there are many potential buyers. At a price of $1,500, 1 million computers are demand- ed. The consumer surplus at this price is equal to the shaded area: the area below the demand curve but above the price. This is the total net gain to consumers generated from buying and consuming computers when the price is $1,500.

9. Producer Surplus
Potential Sellers
Cost
Andrew $5
Betty
$15
Carlos
$25
Donna
$35
Engelbert
$45
The minimum price at which a supplier is willing to sell is called his or her cost.

10. Producer Surplus

11. Producer Surplus Supplier Cost Price=$30 PS = P - Cost Aleisha $5 $30
$25
Brad
$15
Claudia
Darren
$35
Will not sell
Edwina
$45
Total PS=$45

12. Producer Surplus
The total producer surplus generated by sales of a good at a given price is equal to the area above the supply curve but below that price.

13. Total Surplus

14. Can we do better?

15. Can we do better?

16. Can we do better?

17. Excise Taxes and Efficiency

18. Excise Taxes Tax on each unit of a good or service sold
EXAMPLES: Gas tax, cigarette tax
Disrupts market efficiency

19. Excise Taxes – Initial Situation

20. Excise Tax – $1 Tax Instituted
Tax of $1 instituted
Wedge of $1 created
Shifts Qs to right
Increase in equilibrium P and Q

21. Excise Taxes Price paid by consumers/suppliers called TAX INCIDENCE
Wedge = size of tax
Size of tax incidence depends on elasticity

22. Tax Incidence – Consumers
Inelastic Demand + Elastic Supply
Consumers bare majority of cost
Little flexibility for consumers
Producers have substitutes for product

23. Tax Incidence – Consumers

24. Tax Incidence – Suppliers
Elastic Supply + Inelastic Supply
Suppliers pay majority of cost
Consumers have many substitutes
Suppliers do not have other options for product

25. Tax Incidence – Suppliers

26. Benefits and Costs … Revenue for government
Necessary for gov’t to function
Pays for parks, roads, fire, police, etc.

27. Revenue from excise tax…

28. Benefits and Costs … Revenue for government Deadweight loss
Necessary for gov’t to function
Pays for parks, roads, fire, police, etc.
Deadweight loss
Lost transactions eliminate producer and consumer surplus

29. Deadweight Loss

30. Deadweight Loss + Elasticity

31. Deadweight Loss + Elasticity